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Quantitative easing alone will not be enough to rescue the Eurozone - IoD

15 Jan 2015

Bond-buying bonanza may blunt necessary structural reforms

Commenting on the European Court of Justice declaring that the ECB’s Outright Monetary Transactions bond-buying programme is legal and necessary ‘in principle’, James Sproule, chief economist at the IoD said:

“With the advice presented to the European Court of Justice, the EU has moved one step closer to full blown quantitative easing. This should be cause for some concern, not least because the ECB’s bond-buying bonanza may well reduce the urgency with which necessary supply-side reforms are implemented. Structural reform is needed to make Europe more competitive, more conducive to enterprise, more attractive to foreign investment and more productive across the board. The European Union needs reform, and in the UK business support for the EU is predicated on such reform taking place.

“While it may be tempting to assume that European QE will put the euro zone on a similar recovery path to that seen in the US and the UK, it would be wrong to think throwing cash around will be enough on its own to put Europe on the road to sustainable recovery. Here, the case of Japan should serve as a warning. The Japanese also faced a significant recession in the early 1990s and an economy in dire need of reform. They embarked upon a massive programme of government spending which did little to promote sustainable growth, resulting in soaring government debt. At the outset of the Japanese great recession their government debt stood at 67% of GDP, roughly in line with debt levels today seen in Germany (56%), and the UK (82%). By 2012, Japanese debt to GDP had reached 237%.

“With the Japanese example in mind, it is vital that Europe approaches QE as one measure in a wider package of reforms. Member states need to work quickly to liberalise social and employment law, complete the single market in services and embrace digital innovation. The risk is that QE blunts the desperate need for wider economic reforms. By putting all their eggs in the one basket of government action, politicians risk delaying a return to sustainable growth.”